ACCC Report on Reducing Fuel Price Variability

The Treasurer, Peter Costello, and the Minister for Industry, Tourism and Resources, Ian Macfarlane, today announced the Government's response to the Australian Competition and Consumer Commission (ACCC) report on Reducing Fuel Price Variability.

The Ministers welcomed the report and noted the ACCC's recommendation that regulation to limit price cycles should not be implemented, due to the significant costs and likely higher average prices to consumers that would result from such measures.
The Government has agreed to all five of the report's recommendations, as outlined in the attached response.

Mr Macfarlane noted that the report provided useful input for current consideration of policy options to achieve a competitive and sustainable industry. This consideration includes individual discussions with stakeholders, the convening of a Petroleum Industry Forum and the development of a Downstream Petroleum Policy Framework. Mr Macfarlane also reaffirmed the Government's commitment to pursue specific petroleum industry reform initiatives which have broad industry support.

Mr Costello said that he had written to the ACCC and requested that the ACCC collect and make available the information it considers would enhance consumers awareness of fuel price volatility and also provide the information to industry, motoring and consumer groups to encourage its wide dissemination, including on the Internet. The Government has also asked the ACCC to continue to monitor the pricing arrangements in Victoria and Western Australia and provide a further report on the outcomes of these arrangements before the end of 2002.

The ACCC's report is available at http://www.accc.gov.au

CANBERRA
14 May 2002

RESPONSE TO THE AUSTRALIAN COMPETITION AND CONSUMER COMMISSION REPORT ON REDUCING FUEL PRICE VARIABILITY

In March 2001, the Government requested the ACCC to examine the feasibility of placing limitations on petrol and diesel price fluctuations throughout Australia. This was due to consumer concerns about petrol price cycles and that prices can suddenly increase by as much as 10 cents per litre in a day.

However, price cycles also provide people, particularly those that are price conscious, with the opportunity to purchase fuel at low prices. Indeed the report finds that 60 per cent of fuel is sold at below average prices. In this context, the Government notes that reducing petrol price variability will reduce the benefits that most consumers gain from timing their petrol purchases and that furthermore, all consumers will lose if average petrol prices increase as a result of regulatory intervention.

The report finds that volatility of retail petrol prices is generally confined to major cities and some rural towns on major highways. Retail diesel prices do not display price volatility.

The report finds the causes of local price cycles to be complex and that there is no agreement among industry participants as to the significance of suggested factors. However there is a strong suggestion that larger petrol price cycles occur when average petrol prices are relatively low and where local competition is strongest.

The following are the Commonwealth's responses to the Commission's recommendations.

The Government agrees with this recommendation.

Publication of information about the price cycle should increase consumer understanding of the nature of price cycles and how they work. It will also help them to plan the timing of their petrol purchases.

The Government will be asking the ACCC to collect and make available the information it considers helpful for consumers and also provide the information to industry, motoring and consumer groups to encourage wide dissemination of this information, including on the Internet. The Government also encourages interested consumers to use the range of services providing petrol price information.

The Government agrees with this recommendation.

In 1998, the Government sought wide ranging reform of the petroleum industry including repeal of the Petroleum Marketing Retail Sites Act 1980 and the Petroleum Marketing Retail Franchise Act 1980 to be replaced by an enhanced industry Oilcode and open access arrangements. These reforms have been stalled due, in part, to industry disagreement.
The Government still considers that implementation of the elements of the package will enhance industry efficiency and contribute to lower petrol prices. Accordingly, discussions continue to be held between the Government and industry regarding the package. The issue has been discussed at an industry forum convened by the Minister for Industry, Tourism and Resources on 16 April 2002 and further consultation is planned. The Government notes that it only intends to pursue petroleum industry reform if there is broad industry support for reform.

The Government agrees with this recommendation. Generally, the Government does not prefer regulation, unless it will generate net benefits to the community as a whole. The report does not find a compelling reason for regulating terminal gate prices (TGP), and there are concerns that such regulation would be difficult to make effective and may result in increasing average retail prices.

While submissions from industry groups, consumer groups and State Governments generally supported TGP, there are significant differences in the definitions of TGP supported. The two States that have implemented TGP so far use different approaches.

However the Government is aware of industry concerns at the apparent lack of transparency of wholesale petrol prices. The Government is keen to encourage greater price transparency as this is likely to enhance competition.

The Government considers that terminal gate pricing can improve the ability of consumers to evaluate changes in fuel prices over time as well as differences in fuel prices between regions. It has urged that regional industry and community groups, including regional councils, use available terminal gate pricing information to ensure access to competitively priced fuel in rural and remote areas.

The Government has set up a consultation forum with State and Territory agencies that is considering terminal gate pricing mechanisms. This forum will continue to facilitate consistency in regulatory mechanisms across Australia where these mechanisms are found to be warranted. The Government has also received advice on TGP mechanisms from industry representatives at the Petroleum Industry Forum. This advice confirms support for a national approach to TGP but views remain divided on the nature and extent of possible Government intervention.

The Government will ask the ACCC to continue monitoring the Western Australian and Victorian arrangements.

The Government agrees with this recommendation. It is unclear that there will be benefits from implementing any of these options and it is likely that there will be significant costs.

The Government removed wholesale prices surveillance in August 1998 due to evidence that the setting of a maximum endorsed price facilitated price coordination, not competition, encouraging companies to charge the maximum price rather than a lower one. The system also had harmful side effects on the efficiency of the industry. Prices surveillance imposes considerable compliance costs on industry and administrative costs on governments, which in turn would be passed on to consumers and taxpayers. It would be expected that the 24 hour rule, retail price regulation, and limitations on price increases would have administration costs a number of times higher than wholesale price surveillance because they involve surveillance of retail outlets.
Limiting price cycles is likely to reduce consumer's ability to purchase petrol at below average prices (at which 60 per cent of fuel is sold according to ACCC estimates). Further it is also possible that these options may result in increasing average prices due to a reduction in the flexibility of firms to compete in the market place and higher compliance costs. The report also demonstrates that significant retail price cycles existed while wholesale prices were under prices surveillance and continue to exist under the Western Australian arrangements.

It is also notable that most submissions to the inquiry did not support any of these options, on the basis that they would be administratively costly and that higher average fuel prices would result.

The Government agrees with this recommendation.

The Government notes that, up to November 2001, the ACCC identifies no significant change in the retail price cycle in Western Australia. Although legislative change to close a loophole took effect from 24 August 2001, ACCC data from September and October also suggests there has been no significant change to the price cycle.
A number of submissions to the inquiry expressed concerns at the effect of the arrangements, particularly on the competitiveness of independent operators. The Government considers that competition is a key factor in keeping petrol prices low and that competition is enhanced by the presence of independents.

The Government will ask the ACCC to continue monitoring these arrangements and report back before 31 December 2002.